Introduction To Dividends: Terms To Know And Other Basics | Investopedia Introduction To Dividends: Terms To Know And Other Basics Introduction To Dividends: Conclusion Cash Dividend Cash payments made to stockholders, paid on a per share basis, quoted as a dollar amount or as a percentage of the current market value. Cash dividends are typically paid out of the company's current earnings or accumulated profits. Date Of Record The date the company uses to determine its shareholders or "holders of record." Declaration Date The date a company's Board of Directors announces an upcoming dividend. Dividend A distribution of a portion of a company's earnings paid to its eligible shareholders. Dividends can be in the form of cash, stock and property. Dividend Coverage Ratio The ratio between a company's earnings and its net dividend to shareholders. This ratio helps investors measure if a company's earnings are sufficient to cover its dividend obligations. Dividend coverage is calculated by dividing earnings per share by the dividend per share. Dividend Reinvestment Plan (DRIP) A plan offered by certain dividend-paying corporations that allows you to automatically reinvest cash dividends by purchasing additional shares of stock on the dividend payment date. The date on or after which a stock is traded without a previously declared dividend.

One-time Dividend A special dividend paid in addition to regular cash dividends. Payment Date The date a declared dividend is scheduled to be paid. Shareholder Any person, company or institution that owns at least one share in a company. Also called stockholder. Stock Dividend Stock dividends are dividends in the form of additional shares of stock instead of cash. Dividend Basics Companies that earn a profit can: Reinvest the profits through expansion, debt reduction and/or share repurchases; or Pay a portion of the profits to shareholders; or Both reinvest and payout to shareholders. When a company pays a portion of its profits to shareholders, it does so through the payment of dividends. A dividend is a payment made to eligible shareholders, paid on a quarterly or yearly basis that represents a portion of the company's profits. Companies in the United States typically pay quarterly dividends, while non-U.S. companies generally pay annual or semi-annual dividends. Not all companies pay dividends to shareholders, and companies that do pay may increase, decrease or eliminate future dividend payments, depending on the performance of the business. For example, a company may decrease its dividend to free up cash to acquire another company.

Most companies, however, try to maintain or increase dividends to keep shareholders happy and avoid drawing negative publicity. Dividends are normally quoted on a per share basis, meaning that the dividend each shareholder receives is based on the number of shares that he or she owns. For example, if you own 100 shares of stock in company XYZ and the company decides to pay an annual dividend of $5 per share, your dividend would be $500 (100 shares x $5 per share). Dividends can also be quoted in terms of a percent of the current market price; for example, the company may announce a 2.5% dividend. The dividend will be equal to 2.5% of the current stock price. Each eligible shareholder's dividend will be that figure multiplied by the number of shares currently held by the shareholder. For example, assume stock XYZ is currently trading at $50 per share and the company offers a 5% dividend. The dividend would be $2.50 per share (.05 dividend x $50 share price). A stock's dividend yield is the expected yearly dividend divided by the current stock price: Figure 1: How to calculate a stock\'s dividend yield.

For example, assume stock XYZ is trading at $50 per share and the company offers an annual dividend of $5 per share. The dividend yield would be 10% ($5 dividend ÷ $50 share price). Note that if the stock is trading at a higher price, say $100, the dividend yield decreases ($5 dividend ÷ $100 share price = 5% dividend yield). Conversely, if the stock is trading at a lower price, such as $25, the dividend yield increases ($5 dividend ÷ $25 share price = 20% dividend yield). [Please note, these figures are for illustrative purposes only; a 20% dividend yield would be uncommon (and cause for further research).] It is easy to become enamored with companies offering high dividends; however, keep in mind that these impressive figures might not represent a stable investment. High dividend yields are frequently indicators of low future growth prospects. A very high dividend yield might be a flag that the company is facing financial difficulty and that the market expects it to be accompanied by cuts to future dividends. Stocks with a low dividend yield, on the other hand, often indicate an expectation of high future growth.

The historical average dividend yield for dividend-paying S&P 500 stocks has been between 2 and 5%. Cash Dividends, Stock Dividends and One-Time Dividends Cash dividends are what we normally think about when referring to dividends. These are cash payments made to stockholders, paid on a per share basis, quoted as a dollar amount (such as $5 per share) or as a percentage of the current market value (for example, a 2.5% dividend). Cash dividends are typically paid out of the company's current earnings or accumulated profits. Often, investors are able to reinvest the dividends to purchase additional shares of stock. Stock dividends are in the form of additional shares of stock instead of cash. The number of additional shares you receive depends on the number of shares you currently own. For example, a company may issue a stock dividend equal to five shares of stock for every 100 owned by each shareholder. If you have 500 shares, you would receive 25 shares. The price of the stock will likely respond to the dividend so that shareholders' post-dividend wealth remains the same.

The stock dividend increases the number of shares each stockholder owns but does not necessarily have an immediate effect on the overall value of each stockholder's shares. A company may also pay a special one-time dividend in addition to its regular cash dividends. A company may pay a one-time dividend for a variety of reasons, such as a sudden increase in cash resulting from the sale of a business or substantial litigation winnings. During the last quarter of 2012, with the " fiscal cliff " approaching in the U.S., many companies issued one-time dividends in anticipation of the higher dividend tax rates presumed to go into effect starting Jan. 1, 2013. Introduction To Dividends: Dividend Dates Related Articles Seven words that are music to investors' ears? "The dividend check is in the mail." Investing Understanding dividends and how they work will help you become a more informed and successful investor. Investing Find out how a company can put its profits directly into your hands. Investing Apple's dividend has had healthy growth ever since its 2012 reinstatement, thanks to Apple's continuously rising revenue, earnings and operating cash flow.

Investing Discover details about fundamental analysis ratios that could help to evaluate dividend paying stocks, and learn how to calculate these ratios. Investing Understanding the dates of the dividend payout process can be tricky. We clear up the confusion. Retirement Shareholders - How Stocks and the Stock Market Work | HowStuffWorks How Stocks and the Stock Market Work Dan Akerson/ Getty Images Shareholders are the people who own shares of stock in a company. Collectively, the shareholders are the owners of the company, since each share of stock entitles the owner to a say in how the corporation is run. Shareholders elect a board of directors to make the company's major decisions, such as the number of shares to be issued to the public. Interestingly, not all corporations decide to have public shareholders. Corporations can choose to be privately or publicly held. In a privately held company, the shares of stock are all owned by a small group of people who know one another. They buy and sell their shares amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange. Up Next Retirement Accounts: Transfer vs. Rollover Trying to please thousands of anonymous shareholders is a difficult task for any corporation. So why do they do it?

The main reason that companies choose to issue stock to the public is to raise a large quantity of investment capital quickly through an initial public offering ( IPO ). The corporation might sell one million shares of stock at $20 a share to raise $20 million in a short amount of time (that's a simplification, however -- the brokerage house in charge of the IPO will extract its fee from the $20 million). The company then invests the $20 million in equipment and employees. But what do the shareholders get out the relationship? If the corporation chooses to pay an annual dividend, then shareholders will receive a cut of the profits every year. Very few young companies issue dividends, however. They're more likely to issue growth stocks, in which all of the profits are reinvested. In this case, shareholders are banking on the fact that the right corporate management will help the company grow and generate even more profit. It's this potential for future success that will help determine the stock price on the open market. And if the shareholder holds onto a growth stock for long enough, he could eventually sell it for a significant gain. We'll take a closer look at the market forces behind stock prices in the next section.

Shares Definition | Investopedia Loading the player... What are 'Shares' Shares are units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends . The two main types of shares are common shares and preferred shares . Physical paper stock certificates have been replaced with electronic recording of stock shares, just as mutual fund shares are recorded electronically. BREAKING DOWN 'Shares' When establishing a corporation, owners may choose to issue common stock or preferred stock. Most companies issue common stock. The stock may benefit shareholders through appreciation and dividends, making common stock riskier than preferred stock. Common stock also comes with voting rights, giving shareholders more control over the business. In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock. In contrast, preferred stock typically does not offer appreciation in value or voting rights in the corporation. However, the stock typically has set payment criteria; a dividend that is paid out regularly, making the stock less risky than common stock. Also, preferred stock may often be redeemed at a more beneficial price than common stock.

Because preferred stock takes priority over common stock, if the business files for bankruptcy and pays its lenders, preferred shareholders receive payment before common shareholders. Authorized and Issued Shares Authorized shares comprise the number of shares a company’s board of directors may issue. Issued shares comprise the number of shares that are given to shareholders and counted for purposes of ownership. Because shareholders’ ownership is affected by the number of authorized shares, shareholders may limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they conduct a meeting to discuss the issue and establish an agreement. When shareholders agree to increase the number of authorized shares, a formal request is made to the state through filing articles of amendment. Example of Shares Near the end of June 2016, investors were taking advantage of falling share prices as a result of Brexit. Such declines had not been seen since the credit crisis of 2008. Much cash was being invested in banks such as Barclays PLC and homebuilders such as Barratt Developments PLC, two sectors that experienced the biggest price drops. Exchange-traded funds (ETFs) that follow the Financial Times Stock Exchange (FTSE) 100 and the FTSE 250 were actively invested in as well.

With the market being down, investors took advantage of buying more shares at lower prices, potentially increasing their long-term profits. Trading Center company shares - how do they work understand the process company shares - what are they A share is a token of ownership, and each one represents a vote in the company concerned. Any individual shareholder can have just one, or many. what do they do? As every share counts as a vote in the company, the more shares you have the more votes you have - for example, a person with 5 shares can out-vote a person with 4 shares. The proportions of these votes depend on how many shares you have issued. For example, if you issue 100 shares and have two shareholders with 50 shares each this is exactly the same as issuing 10 shares and each shareholder having 5. We do not advise you to issue many shares, as the number of shares increase your liability. Shares may also carry the right to dividend and may allow the individual shareholder to benefit from the sale of the company. what are they worth? Each share has a "nominal value" (usually £1) but that has no bearing on the true value of the share or of the company.

For instance, a company with a "nominal capital" of £1,000 represented by 1,000 shares may be sold for £200,000, in which case those 'nominal' £1 shares would have a 'real' value of £200 each. what is a dividend? Dividend is a payment made to the shareholders of a company in proportion to the number of shares held. Dividends are not paid automatically; it is the decision of the board of directors whether a dividend will be paid in a particular year, and how much dividend will be paid per share. This decision will normally be made on the basis of the company's profits. who can own shares in a limited company? Anyone can hold shares in a limited company, including people who also work in the company and receive a salary. who can own shares in a private limited company? A private company is normally restricted to issuing shares to its members, to staff and their families and to debenture holders. However, by private arrangement, the company may issue shares to anyone it chooses. Shares in a private limited company may only be sold or transferred with the permission of the directors. what are the different share types?

ordinary: As the name suggests these are the ordinary shares of the company with no special rights or restrictions. They may be divided into classes of different value. preference: These shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes. differential share rights/values: Differential share rights/values: It is also possible to customise the rights of ordinary shares to create differential voting and/or dividend rights. Commonly, this is done by creating A, B and C shares (and so on) out of the ordinary share stock, with each share class being allocated rights as required. When making such an arrangement it is important to think that matter through in terms of what the company wants to achieve, but without attempting to use legal jargon. Duport Associates can advise and assist in the creation of special share classes by means of a written resolution. is there a maximum and a minimum share capital? There is no maximum to any company's authorised share capital and no minimum share capital for private limited companies. However, a public limited company must have an authorised share capital of at least £50,000 (and, if it is trading, an issued capital of £50,000).

must shareholders pay for their shares? In a private limited company there is no obligation for the shareholders to pay for the shares they own. If the company decides that its shares should be 'paid up' then payment for those shares is made into the company's own funds and those payments must be shown in the company's accounts. If shares are 'paid up' and the company subsequently goes into liquidation, there may be no further claim on the shareholders*. If shares are not 'paid up' and the company goes into liquidation due to debt, the shareholders will be required to pay the creditors the value of the shares that each shareholder owns. * A director may be liable to further claims if it can be shown that he or she acted illegally, negligently or irresponsibly. need more help? If you find you are unable to answer all of your questions in this section, we are always delighted to hear from you. Call us on 0117 950 2667 with any enquiries account All What You Need to Know about Shares of Stock FAQs – Shares of Stock All What You Need to Know about Shares of Stock What are Shares of Stock and how are they used? What is Par Value? What are Authorized Shares?

What’s the Difference Between Issued and Authorized Shares? What does Capitalization Mean? What is a Dividend? What are Issued Shares? How Many Shares of Stock are Required? What is no Par Value Stock? Must Stock Have a Par Value? What is the difference between “par” and “no par” stock ? What is the relationship between the face value of the shares and the value of the company? Can I change the value of the stock in the future ? Find the answers to these questions here. What are Shares of Stock and how are they used? Shares of stock are written articles that represent the amount of money invested in the corporation by an individual shareholder. The corporation determines, at the outset of incorporating, how many shares it shall issue and what classes of shares (No Par, Par, Common, Preferred, Participating, etc.) it will issue. In a close corporation, the number of shares are determined and sold to only one or a few investors. In other corporations the shares are sold to many investors or to the public. Each share represents ownership in the company, and it entitles the holder to certain types of rights (voting rights, dividends, etc.).

The different classes of stock determine how dividends will be paid, and how much money will be paid for each share of stock in the corporation. Each share certificate will be marked with the amount of par (the minimum amount of money that must be paid for the share). Share certificates may also be marked as no par, with no minimum amount being paid for the share. This designation must be made at the outset of incorporating and provided for in the Articles of Incorporation. Additionally, Common stock represents the class of shareholders who shall be paid a dividend last, after the Preferred shareholders are paid first (if any exist). If there are no Preferred shareholders, then the dividend amounts are split equally among the Common shareholders. What is Par Value? A business corporation must sell shares of stock in order to capitalize the corporation, that is, provide the corporation with its own capital, separate from the money of its owners. This separation provides part of the support for shielding the shareholders from personal liability for the debts and obligations of the corporation. Shares of stock sold by the corporation represent proportionate ownership interests held by shareholders in the corporation. “Par value” is a dollar value assigned to shares of stock which is the minimum amount for which each share may be sold.

There is no minimum or maximum value that must be assigned. Shares may also have “no par value,” which means that the Board of Directors will assign a value to the stock below which the shares cannot be issued. There is no minimum number of shares that must be authorized in the articles of incorporation. One or more shares may be authorized. However, the corporation may not sell more shares than it is authorized to issue and it must receive consideration in exchange for its shares. What are Authorized Shares? State law specifies that shares of stock in the corporation will be issued under the direction of the board of directors. But, since the corporation is set up to benefit the shareholders, the shareholders set, or limit, the number of shares the directors are “authorized”, or allowed, to issue. Since the directors are not allowed to issue shares without authorization from the shareholders, the number of authorized shares is equal to the number of total shares. What’s the Difference Between Issued and Authorized Shares? The board of directors control the issuance of stock. Authorized shares is the total number of shares of stock that the board of directors are “authorized” to issue to shareholders. The board may issue all the shares now, or issue some now, and some later.

Authorized shares become issued shares when “issued” or distributed to a stockholder. Shares that are not issued are usually called authorized but UN-issued shares. UN-issued shares belong to the corporation and are not considered for shareholders’ ownership percentages. What does Capitalization Mean? Capitalization is a term that requires a knowledge of accounting to understand, and can have different meanings. With a new corporation, the term generally refers to the amount of money that a corporation has in its “kitty” when operations begin. Some states have minimum capitalization requirements to insure that corporations have a bare minimum of assets before starting operations. Since shareholders are somewhat insulated from lawsuits against a corporation, these assets provide a means to pay any potential lawsuit winners. Minimum capitalization requirements also make it a little more difficult to start a corporation, and was probably started to help to keep out the “riff raff ” Today, only a few states have minimum capitalization requirements. What is a Dividend? A dividend is a special payment, usually paid at the end of each quarter, and is based on the profits made by the corporation during that quarter. Dividends are usually paid in cash or additional stock to the shareholders. This is a shareholder’s reward for investing in the corporation.

It is much the same as interest on a loan except that the dividend is based on the income of the corporation, and may or may not be a regular payment. Also, dividends are not deductible by the corporation while interest payments are. Some owners pay themselves a small salary to minimize FICA withholding, and pay themselves a quarterly dividend instead. What are Issued Shares? Issued shares are easily confused with authorized shares. Authorized shares is the maximum number of shares that the board of directors is “authorized”, or allowed to issue. Issued shares, however, is the number of shares actually “issued”, or given out to shareholders. Only issued shares are counted for ownership purposes. How Many Shares of Stock are Required? A corporation can’t be a corporation without at least one share of stock. So you must have at least one shareholder, and one share of stock. You can have (authorize) as many shares of stock as you want, however, this may increase your filing fees in some cases. What is no Par Value Stock? Since par value more or less means the price to be paid for the shares when purchased from the corporation, no par value stock is stock for which no fixed price is set.

This is usually the case in small corporations where the owners issue themselves a number of shares and simply infuse money in the corporation when needed. Corporations issue no par stock for flexibility. If the corporation’s stock has no par value, then there is no set “price” for the stock. In this case, the directors can raise the “price” of the stock when the corporation becomes more valuable. You see, with no par value stock, the directors decide how much must be paid for the stock each time it is issued to a shareholder. Must Stock Have a Par Value? No. Most often in a small business corporation the stock is called “no par value stock” which simply means that there is no set amount of payment required to purchase the stock of the corporation. Each time stock is issued, the directors will decide how much must be received for the shares. What is the difference between “par” and “no par” stock ? Par value stock has a stated value on its face. No par value stock has no stated value and its worth depends on what an investor is willing to pay. What is the relationship between the face value of the shares and the value of the company?

When you go to sell your company you need to have someone value it for you, usually a CPA, or you can value it yourself based on how much you feel that it is worth. This valuation is based on several factors, including the sales or fees earned, fair market value of your assets. The customer list and the goodwill of the company. The person who performs the valuation will inform you of approximate worth of your company. You then would make the decision to either sell the assets of the company or the stock of the company. All companies, even the publicly traded ones have a par value on their shares which is much lower than the current valuation of the stock. Can I change the value of the stock in the future? There is no need to do that. All companies, even the publicly traded ones have a par value on their shares which is much lower than the current valuation of the stock. The par value is usually a figure that is set depending on the state and can be used by a state to set the renewal fees or the state taxes. How to increase the authorized shares of stock? An increase on the authorized shares of stock has to be formally requested to the state by filing “ articles of amendment “.

A shareholders’ meeting is ussually required to authorize an increase of the shares since their ownership of the company will be affected due to this change. Learning Center C Corporation vs S Corporation - What's the Difference? C Corporation vs S Corporation – What’s the Difference? C Corporation C Corporations , or “C Corps” as they’re commonly known, are the primary format of publicly held companies. Their shares can be easily bought and sold on public stock exchanges since there is no limit on the number of shareholders they can have. In addition, unlike S Corporations, C Corp shareholders are not limited to natural persons (can be corporations or partnerships), nor is there a requirement that they be US residents or citizens. C Corp status enables a business to function as a separate legal entity, able to enter into contracts, borrow money, hire employees and perform all other business functions without personal guarantees from its shareholders. This separation enables shareholders to participate in the company’s profits, but without the potential liability that a sole proprietor or partner would have in the event of liabilities, lawsuits and income tax obligations.

S Corporation S Corporations , or “S Corps”, are similar to C Corps in that they are owned by shareholders, and provide all the same legal protections from debts, lawsuits and other company liabilities. They can also conduct business as a separate legal entity from their shareholders, including the hiring of employees. In order to become an S Corp, the business must file IRS Form 2553 (Election by a Small Business Corporation) with the Internal Revenue Service, and meet the following requirements: The business must first be either a C Corp or a Limited Liability Company (LLC) (which have the option to elect to be taxed as a corporation) The maximum number of shareholders is 100 Shareholders must be natural persons, not partnerships or other corporations The business must be a domestic corporation, and its shareholders must be either residents or citizens of the US An S Corp must have only one class of stock (where a C Corp can have both common and preferred stock, and various classes of each) Tax Treatment of Each Corporation Type C Corp. A C Corp is a separate entity for income tax purposes.

It files a corporation income tax return ( IRS Form 1120 ), where it reports its profit or loss, and pays income taxes at the corporate income tax rate based on its profits. Distributions of profits to shareholders in the form of dividends holds the potential for double taxation. Since dividends are paid out of the corporation’s after-tax income, they are then subject to the individual income tax rates of each individual shareholder to whom their paid. Thus the same income is taxed twice. C Corps can get around this by paying their shareholders in salary, benefits and bonuses, which while taxable to the shareholders, are tax deductible to the corporation. However, for corporations with many shareholders, most of whom are not also employees of the company, this attempt to avoid double taxation will not be possible. S Corp. S Corps eliminate the double taxation issue that is faced by C Corps. They do that by distributing profits to their shareholders, in the same way that partnerships do. The income is then taxed only at the individual shareholders rate, with no tax liability to the company itself. This form of income tax consideration is also a benefit when the company incurs losses. The losses can be passed on to shareholders, who can use them to offset other income they have.

By contrast, losses to C Corps can only be carried forward to lower future income tax liability. Profits and losses in an S Corp are allocated to each shareholder based on his or her interest in the business. The percentage interest in the business is determined by each shareholders initial capital contribution to the company, plus any subsequent contributions, less any distributions made, divided by the total amount of capital in the company from all shareholders. Allocations are reported to each shareholder via IRS Schedule K-1 , in much the same way it’s reported for partnerships. Comparison Between the C Corporation and S Corporation Retained Earnings, Stock Repurchase, and Dividends Retained Earnings, Stock Repurchase, and Dividends How a Publicly Traded Company Uses Profits Tuesday, August 21, 2012 Myspace Suppose at the end of every month, you and I were fortunate enough to have a significant amount of money left over after paying our expenses. What might we do with the extra cash? We have three basic choices. We can: 1. Save it 2. Spend it 3. Give it away In principle, companies that are profitable have the same three choices as do people.

They can save the money, spend the money, or give it away. However, the companies’ situation is not nearly as simple. Harley Hahn To explain why, I’m going to describe the ways in which extra cash can be used by a “publicly traded company,” that is, a company that issues stock to the general public. This includes virtually all of the companies you know about. (If a company’s stock is not offered to the public, it is referred to as a “privately held company.”) After a company pays all its expenses, whatever money is left over is referred to as “profit” or “earnings.” The main goal of every company is to make as much profit as possible. If you, as a person, have extra money at the end of the month, what you do with it is your business (as long as you don’t break the law). The same holds for a privately held company. Retained Earnings: Publicly traded companies, however, must follow a large number of complicated regulations and accounting rules. Moreover, because their stocks are traded freely on the open market, such companies are watched closely by the media, by stock market analysts, and by the Securities and Exchange Commission.

So whatever a publicly traded company chooses to do with its profits will, eventually, become public knowledge. As you might expect, the people who are most interested in what a company does with its money are the owners, in this case, the shareholders. As a general rule, if a company is profitable, the shareholders will try to pressure the company into giving them some of that extra cash. Of course, the executives who run the company have to balance all the priorities, only one of which is distributing money to shareholders. In case you ever want to be an executive of a large company, here is a list of what you might do with your profits: 1. Save Money: – Set aside cash for expected future expenses – Set aside cash for unexpected future expenses 2. Spend Money: – Buy fixed assets (capital expenditures) – Research and develop new tools and products – Pay bonuses to executives and other employees – Pay down debt – License intellectual property, such as patent rights – Expand the market for your products – Make investments that, hopefully, will generate a profit When the executives use a company’s profits in the ways I described above, they are using the money for the good of the company itself.

Money used in this way is referred to as “retained earnings,” because the money is kept by the company for its own use and not distributed to shareholders. Since the executives are responsible for making the company profitable, it is crucial that they know how to use retained earnings wisely. Specifically, they must decide how much profit should be retained and how much should be distributed to shareholders. Sometimes the executives of a company will choose to retain all the earnings, which means the shareholders get nothing. However, if a company is profitable year after year after year, the shareholders – as owners of the company – expect to receive some of that profit for themselves. There are two ways in which this can happen. First, the company may use some of the money to increase the value of its shares. (I’ll describe how this works in a moment.) This pleases the shareholders, of course, because the shares they already own become more valuable. Alternatively, the company may choose to distribute cash directly to the shareholders. Stock Repurchase: I have already summarized how a company can use retained earnings to (1) save money, or (2) spend money.

To complete the summary, here are the two ways in which a company can give away some of its profits to its shareholders: 3. Give money to shareholders: – Increase the value of existing shares – Distribute cash directly The most common way for a company to increase the value of its shares is to buy a large number of them on the open market and then take those shares out of circulation. This is called a “stock repurchase” or “share buyback.” Because a stock repurchase reduces the number of outstanding shares, it has the effect of raising the value of the remaining shares. If you own shares in such a company, you will find that, after the stock repurchase, your shares will go up in value. Although a stock repurchase is profitable for shareholders, it is a relatively rare event. This is because it will only happen when the company’s executives think the stock is significantly undervalued and, at the same time, the company has enough extra money to buy back a large number of shares. Generally speaking, companies that decide to give money to shareholders will do so directly in the form of a quarterly payment.

(Quarterly means every three months.) Before we get into the details, I want to digress for a moment to explain why the corporate world works in three-month cycles. By law, publicly traded companies in the United States must balance their books every quarter by filing special forms with the Securities and Exchange Commission (SEC). At the end of each of the first three quarters of the year, the company files a quarterly report called a Form 10-Q. At the end of the fourth quarter, the company files an annual report called a Form 10-K. All such SEC reports are released to the public. Within these reports the company must provide detailed statements, showing profit and loss for the quarter (or the year), as well as a continuing view of the company’s financial position. On the day such a report is filed with the SEC, most companies will also make a public announcement in the form of a press release. In addition, large companies will usually also host a conference call with stock market analysts. During that call, the company’s top executives will discuss the report in detail and answer questions.

Now you can see the reason all publicly traded companies operate on quarterly cycles: It is because of the customs and regulations that force them into organizing their operations into three-month intervals. For this reason, when companies choose to pay money directly to their shareholders, they typically do so by making cash payments every quarter. These payments are called “dividends.” Here is how it works. Understanding Dividends: The process starts when the executives of a company decide to pay a dividend. They take their request to the board of directors for approval. (The board of directors is a small group of people who are elected by the shareholders to represent their interests. To that end, the board chooses the Chief Executive Officer, or CEO, and oversees how he or she runs the company.) No dividends can be paid, or even announced, until the board of directors approves. In fact, even if the company has paid a dividend regularly, every quarter for many years, each new payment must still be approved by the board. On a particular day, called the “declaration date,” the board of directors announces they will pay a dividend and specifies how much it will be. For example, the board might announce that they intend to pay a dividend of 85 cents/share to every shareholder.

If you owned, say, 1000 shares, you would receive $850 (1000 x $0.85). The moment a dividend is announced, a liability is created, because the company now owes money to its shareholders. This liability is immediately recorded on the company’s books as a future expense. Because dividend payments require a company to divide a large amount of money into smaller pieces which are then paid to many different shareholders, the process must be organized carefully. For this reason, when a board of directors announces a dividend, they also announce three more dates (explained below): a payment date, a record date, and an ex-dividend date. The “payment date” is the day on which the dividend will actually be paid to the shareholders. For example, a company may announce that, on September 10, they will pay a dividend of 85 cents/share to every shareholder. Once a dividend is announced, the question arises: For the purposes of paying the dividend, who, exactly, is a shareholder? Using our example, what if someone doesn’t own any shares of the company, but they buy some just before September 10. Does that entitle them to the dividend?

Conversely, what if someone does own shares, but they sell them just before September 10. Do they lose out on the dividend? To avoid such problems, at the time of a dividend announcement the board of directors will also specify a “record date.” Only shareholders who have shares registered with the company on that date are entitled to the dividend. Now, when someone buys or sells shares of stock, it takes time to register the transaction with the company. When this happens, we say that the trade has “settled.” In the United States, it takes three business days for stock market trades to settle. Thus, if someone wants to purchase shares of a company in order to receive an upcoming dividend, he or she must buy those shares at least three days before the record date. This is called the “in-dividend” date. The first business day after the in-dividend date is called the “ex-dividend date.” The ex-dividend date is important, because it is the first day on which shares that are bought and sold do not come with the right to receive a dividend. Although this sounds a bit complicated, it’s not hard to understand when you see an example.

On July 31, 2012, the IBM Board of Directors announced that they would pay a quarterly dividend of 85 cents/share. The ex-dividend date would be August 8; the record date would be August 10; and the payment date would be September 10. This means that, if you are registered as the owner of IBM stock on August 10 (the record date), you will receive a dividend on September 10 (the payment date). If you want to buy new shares, you must buy them before August 8 (the ex-dividend date) in order to be registered by August 10. Once a company begins to pay dividends, it usually continues to do so regularly, every quarter, so long as the company remains profitable. After all, shareholders are the owners of the company, and they deserve some of the profits. Two Dividend Stories – IBM and Apple: The most extreme example I know of is IBM. On April 10, 1913, IBM made its first dividend payment. This was followed by two more in the same year.

There was then a break of a year and a half until April 10, 1916, when they resumed paying. To be sure, as the company’s fortunes varied over the years, the value of its dividend went up and down. However, in all that time, IBM never missed a single quarterly dividend payment! Thus, with the September 10, 2012, payment I mentioned above, IBM will have paid dividends for 386 consecutive quarters (95½ years). An even more interesting dividend story is that of Apple, which for years held onto a huge amount of profit, before finally agreeing to give some of it to its shareholders. Here is how it happened. Apple was incorporated by Steve Jobs and his partner, Steve Wozniak, on January 3, 1977, as a tiny, privately held company. In May 1985, Jobs was forced out of the company, and in February 1987, Wozniak left. Up to that time, Apple had never paid a dividend. Soon after Wozniak’s departure, Apple’s Board of Directors decided that the company was doing well enough to begin to pay a quarterly dividend.

The first dividend was paid on June 15, 1987. The dividends continued, every quarter, until December 1995. By the end of 1995, however, Apple was doing so poorly that the Board of Directors decided to stop paying a dividend. Indeed, during Apple’s 1996 fiscal year (which started on October 1, 1995), Apple lost $816 million. In the 1997 fiscal year, Apple lost $1,045 million. In July 1997, Steve Jobs was hired back by the company as interim CEO. Financially, Apple was doing so badly that, almost immediately, Jobs announced a partnership deal with Microsoft in order to keep Apple afloat. Until then, Microsoft had been Apple’s arch-enemy. With this deal, Microsoft became Apple’s best friend. Jobs negotiated a deal in which Microsoft would make a five-year commitment to release Microsoft Office for the Macintosh. In addition, Microsoft would invest $150 million in Apple. In time, Apple’s fortunes improved. Nevertheless, Jobs became stubbornly reluctant to do anything with Apple’s extra cash except to hoard it.

It is widely believed that Jobs never again wanted Apple to be in the position of having to go hat-in-hand to another company to raise money (especially Microsoft!) just to stay alive. Like someone who lived through the Great Depression and later became a miser, Apple eventually accumulated huge amounts of money which Jobs refused to spend. This is why, until Jobs’s death (on October 5, 2011), it was impossible for Apple’s huge store of cash to be returned to shareholders in the form of a dividend, a share buyback, or both. However, on March 18, 2012, Apple’s Board of Directors announced that the company would finally resume paying a regular quarterly dividend. At the same time, the Board announced a $10 billion, three-year share buyback, to start in October 2012. On August 16, 2012, Apple paid a dividend of $2.65/share, the first in more than 16 years. Why was this such a huge deal? By the time the Apple Board of Directors made the announcement, the company had accumulated more than $100 billion dollars in excess profits.

(Read that last sentence again.) Finally, some of Apple’s wealth was going to be distributed to its shareholders. The move by Apple’s Board of Directors not only put real cash into the hands of the shareholders, it also, indirectly, benefited the shareholders in another way for two reasons. First, in order to generate income, many people choose to invest in stocks that pay dividends. A lot of these people will buy Apple stock now that it has agreed to provide regular income to its shareholders. Second, many so-called “value-oriented” mutual funds are not allowed to buy stocks that do not pay dividends. Now that Apple is paying a dividend, these funds will be able to invest in the company. In the long run, more people and more mutual funds wanting to buy Apple stock will increase its value. Dividends and Taxes: To finish our discussion, I’d like to take a moment to explain how dividends are taxed. When you buy something that you later sell, for more than you paid for it, the profit is considered to be a “capital gain.” For example, if you buy stock (or a car or a painting or an elephant) that you sell for a profit, you have made a capital gain.

In the United States, capital gains are taxed at a lower rate than income. Thus, if you have a choice, it is better to make money by buying and selling something than it is to earn the same amount of money by working for it. In general, dividends are classified as income, not capital gains. However, many people feel this is unfair because the company that pays the dividend must do so with after-tax dollars. In other words, the company must first pay income tax on its profits, and then use what is left over to pay for the dividend. Then the shareholders, who receive the dividend, must pay tax on it for a second time. To mitigate the double taxing of dividends, there is a rule that allows people who have held the stock for at least two months to count dividends as capital gains instead of income. Specifically, if you hold a stock for more than 60 days, within the 120-day period surrounding the ex-dividend date, your dividends are taxed at what is called the “net capital gain rate.” This rate is significantly lower rate than the regular income-tax rate. What does this mean in dollars and cents?

If your regular tax rate is lower than 25%, you won’t pay any tax on your dividends. If your regular tax rate is 25% or higher, you will pay only 15% tax on your dividends. Can you see why many investors want Apple to pay a dividend? As long as they have held their stock for over 2 months, the dividends they receive will be taxed at a low rate. More generally, can you also see why rich people use all the loopholes their accountants can find in order to classify their income as a capital gain? This allows them to pay taxes at a much lower rate than people who work for a salary. Dividends versus Salary Dividends versus Salary Succession and Exit Planning If you are both a director and a shareholder of your company, should you take extra income as a DIVIDEND or as a bonus? You can often save money by paying dividends, but the saving could be marginal and there are other factors to consider in deciding your remuneration strategy. There are no national insurance contributions (NICs) on dividends, which is what produces the saving.

Companies must pay employer’s NICs of 13.8% on a bonus and deduct employee’s NICs of 12% on earnings below the upper earnings limit of £41,450 and 2% on earnings above the limit. Against this saving is the fact that, unlike dividends, salary and employer’s NICs are deductible against CORPORATION TAX. Paying dividends may allow profit to be diverted to a shareholding spouse. This could give an additional tax saving if the spouse pays tax at the basic rate. Dividends do have some drawbacks however. They have to be paid at the same rate to all shareholders, making them less flexible, though you can overcome this by creating different classes of shares with different entitlements. Salaries can be paid even when the company is making a loss. Dividends can only be paid out of profits of the year or undistributed profits of previous years. Dividend income cannot support pension payments. Having a low salary may restrict the amount of tax relief you receive when making payments into your pension scheme. And if you are near retirement and your pension will be based on earnings, you may need to enhance your remuneration at least in some years.

Dividend income may also be treated less favourably by lenders if you are trying to obtain a mortgage. As you can see, this is not an easy subject. Please contact us for a free initial consultation to look at which route is best for you. Key Contacts Does a Limited Liability Company Have Shares? | LegalZoom Legal Info Does a Limited Liability Company Have Shares? by Jeff Franco Is a 1099 Required for an LLC? Ownership interests in a limited liability company business structure are not represented by shares. Shares in a company are only issued for businesses that use the corporate structure. The owners of an LLC are called members, and each has a membership interest representing an undivided claim in all assets of the business and the right to a portion of business profits. Transferability Unlike the shares in a corporation that are easily exchanged, the transfer of a membership interest in an LLC has more restrictions. State laws do not allow for the transfer of a member’s right to engage in management activities. However, a member can sell or exchange a financial interest in the LLC. The transferee of the interest receives a legal claim to the portion of assets and profits that the transferring member has.

If the operating agreement of the LLC allows for the transfer of management rights, then the state prohibition is inapplicable. Becoming a Member An investor can become a member of an LLC at the time of formation if he is included in the certificate of organization. A person may later join the LLC only with the unanimous consent of all current members or by a method the operating agreement stipulates. Although an operating agreement may require it, most jurisdictions do not require a prospective member to make a contribution of money or property to the LLC as a condition to acquiring an interest. In contrast to a corporation, more barriers to entry exist with an LLC. Profit Distribution Most of the jurisdictions do not require an LLC to distribute its profits to members. However, in the absence of an alternate profit allocation in the operating agreement, members have equal rights to the earnings of the company whether they are distributed or not. Regardless of what the operating agreement stipulates, a distribution is never allowable if it will prevent the LLC from paying its debts or meeting other obligations in the normal course of business. Additionally, the distribution may not cause the company’s liabilities to exceed assets.

If a member with authority to declare a distribution does so in violation of a state prohibition, that member is personally liable to the LLC for the improper amount of the distribution. A profit distribution is similar to a shareholder’s entitlement to a dividend; however, shareholders have no claim on the company’s earnings as members of an LLC do. Taxation Just as shareholders must pay personal income tax on a corporate dividend, members of an LLC must pay tax on profit distributions if the LLC elects corporate tax treatment. However, the Internal Revenue Service automatically designates an LLC as a partnership for tax purposes if more than one member exists. Partnership taxation imposes pass-through principles that require each member to report their allocable share of business profits on a personal tax return, irrespective of whether there is a distribution or LLC retention of its earnings. References & Resources What is a Dividend? - Dividend.com What is a Dividend? {:type=>"text", :name=>"", :tabindex=>"-1", :value=>""} Popular Articles Michael McDonald Jan 19, 2017 2017-01-19 The stock market over the next few years may look markedly different than over the last few...

Premium Evan Cooper Jan 19, 2017 2017-01-19 On an absolute basis, it’s easy to see how any dividend stock you own performed last year. Start... Evan Cooper Jan 18, 2017 2017-01-18 There are three ways to invest like the legendary Warren Buffett. If you have $244,000 or... Loading Articles... Follow Dividend.com All stock quotes on this website should be considered as having a 24-hour delay. Certain financial information included in Dividend.com is proprietary to Mergent, Inc. ("Mergent") Copyright © 2014. Reproduction of such information in any form is prohibited. Because of the possibility of human or mechanical error by Mergent's sources, Mergent or others, Mergent does not guarantee the accuracy, adequacy, completeness, timeliness or availability or for the results obtained from the use of such information.

Question: What is the name for money paid out to shareholders of a company out of the corporate profits, based on the number of owned shares?
Answer: Dividend